How are prepayment fees calculated?
Simply put, a prepayment fee is the amount of money necessary to compensate a lender’s funding source to insure that this source receives a previously negotiated return for the use of its money. Funding sources can include banks, insurance companies, mutual fund providers, or as in EAGLE’s case, commercial paper investors.For example, a bank agrees to pay a customer 5.5% interest on a five year Certificate of Deposit (CD). These funds are then loaned by the bank to a borrower for five years at 7%, resulting in a 1.5% “spread”, or profit margin, to the bank. If the borrower repays the loan in only the note’s second year (when CD rates may have fallen to 3.5%), the bank cannot re–invest these funds in an investment vehicle, without higher risk, to ensure that it will receive the 5.5% return to be paid to the original CD holder.In this example, the prepayment fee would be paid by the borrower because interest rates on CDs have dropped. If the borrower were pre–paying the loan to refinance
Simply put, a prepayment fee is the amount of money necessary to compensate a lender’s funding source to insure that this source receives a previously negotiated return for the use of its money. Funding sources can include banks, insurance companies, mutual fund providers, etc. For example, a bank agrees to pay a customer 5.5% interest on a five year Certificate of Deposit (CD). These funds are then loaned by the bank to a borrower for five years at 7%, resulting in a 1.5% “spread”, or profit margin, to the bank. If the borrower repays the loan in only the note’s second year (when CD rates may have fallen to 3.5%), the bank cannot re–invest these funds in an investment vehicle, without higher risk, to ensure that it will receive the 5.5% return to be paid to the original CD holder.In this example, the prepayment fee would be paid by the borrower because interest rates on CDs have dropped. If the borrower were pre–paying the loan to refinance the existing note, then the new, lower rate
Simply put, a prepayment fee is the amount of money necessary to compensate a lender’s funding source to insure that this source receives a previously negotiated return for the use of its money. Funding sources can include banks, insurance companies, mutual fund providers, etc. For example, a bank agrees to pay a customer 5.5% interest on a five year Certificate of Deposit (CD). These funds are then loaned by the bank to a borrower for five years at 7%, resulting in a 1.5% “spread”, or profit margin, to the bank. If the borrower repays the loan in only the note’s second year (when CD rates may have fallen to 3.5%), the bank cannot re‑invest these funds in an investment vehicle, without higher risk, to ensure that it will receive the 5.5% return to be paid to the original CD holder. In this example, the prepayment fee would be paid by the borrower because interest rates on CDs have dropped. If the borrower were pre‑paying the loan to refinance the existing note, then the new, lower rate
